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Woo Hoo! You Qualify… But…

You’ve decided to buy a home, and your lender informs you of collections on your credit report and are told by your loan officer to pay them off. You couldn’t be more excited, you you do qualify, but they want to get a better score so you can get a better rate or maybe you need a better rate to qualify for that wee nicer home you’ve been looking at.

Who’s the expert, your lender of course.. so you run right out and pay off those collections… Sigh. Oh my! Yes this age old advice is still being dispensed by loan officers far and wide. So what does actually happen when you pay them…

After you submit a payment to the collection company, what happens is SO unpredictable. here’s a list of some of the things that COULD happen as a result of you acting on your lender’s ill-dispensed advice.

  1. The collection agent (CA) verbally says they will remove the item. In my 30 years experience I’ve found those guys will tell a consumer ANYTHING to get the cash. Don’t count on it, if they don’t put it in writing it’s not likely gonna happen.
    RESULT: Score will likely drop.
  2. The CA does give you a letter, but it’s not a deletion letter. Yeah, they TOLD you it was a deletion letter but it says “Paid/Satisfied/Settled/0 Balance or some other non-deletion verbiage.
    You’ll send in the letter but the bureau will update the item as PAID and they won’t delete it.
    RESULT: Score will likely drop.
  3. The CA actually deletes the item from the credit. Wow, this is so rare and it happens less and less because of blow-back from the credit reporting agencies (CRA’s) against the CA’s.
    RESULT: Awesome
  4. The CA does nothing. You have a receipt for the payment, but no deletion letter and they don’t update to the bureaus.
    RESULT: Your score didn’t change at all.

 

Penalty for good behavior.

In almost every case the credit score drops or stays the same as a result of paying off a collection. Now, instead of getting closer to that dream home, you’ve potentially just screwed yourself out of it. But don’t worry, your idiot lender will now tell you you only need just a few points and do this or that and we’ll get you qualified again… <clunk>

 

In part two we’ll talk about good deletion letters and why oh WHY does the score go down with a payoff….

 

Yours in Wealth!

 

Credit Guru Ruiz